The Form 1098T was created by the IRS after the initial education tax credits were passed into law, the Hope (now American Opportunity) and Lifetime Learning credits. There are more than just these two, but that is what started it all. In years prior to 2018, colleges had the option of completing either Box 1 or Box 2 related to Qualified Tuition and Related Expenses. Box 1 represented Payments whereas Box 2 was for calculated Billings.
Federally mandated tax reporting now mandates colleges report in Box 1. Form 1098-T reports the Qualified Tuition and Related Expenses paid during the calendar year, up to the amount billed for these expenses. Also included on the form is Box 5, Scholarships or Grants. This box is important for two reasons: it can help calculate how much is eligible for the credit; but often missed, it can also indicate that some of those scholarships are taxable. Let's first look at calculating the credit.
To get a start on what is eligible for the credit, the first step is to subtract Box 5 from Box 1. Why? Scholarships are generally applied to tuition. Also, they are only tax free to the extent that they are applied to tuition (and related expenses). I have more on when they aren't below. So, if the scholarship is paying tuition, and you did not use it for that, then you will not be eligible for the credit. Unfortunately, doing this math is not necessarily the end. Box 1 is what was paid during the year for Qualified Tuition and Expenses billed during the year. Colleges bill for their spring or first calendar year term usually in late November or early December. This allows taxpayers to do some planning, but makes it confusing. On the planning end, the bill isn't usually due until January, so you can decide which tax year works best by paying in either December or January. The confusion is, what did you pay? It is not always simple. For some, the information on the 1098T is all that is needed. For others, the best way is to pull out the statements from the college or request one. Things to remember: all payments you made count, including payments on credit cards and student loans (see below). Unfortunately, this whole confusion sends many to a tax advisor. If you are unsure, having one help, at least the first time through, may not be a bad idea.